The U.S. dollar had a rough year. What's next in 2026?
A version of this article originally appeared in Quartz’s members-only Markets newsletter. Quartz members get access to exclusive newsletters and more. Sign up here.After months of flying blind, markets finally got some inflation data last week. November’s long-delayed consumer price index offered an official look at everyday price pressures after a record-long government shutdown scrambled the economic calendar.The numbers themselves were better than feared. Headline inflation ran at 2.7% year over year, with core inflation at 2.6%. That’s below the roughly 3% readings economists had braced for, and it keeps inflation just inside the psychologically important “two handle” that markets have come to fixate on heading into 2026.At the same time, this was not what you’d call a clean report. Because the BLS was unable to collect October price data during the shutdown, the release arrived without the usual month-over-month changes that help analysts judge momentum. Instead, it functioned more like a blunt snapshot — a confirmation of where inflation stands, rather than a clear guide to where it’s headed next.That distinction matters. And not just for interest ratesIn 2025, inflation stopped being just a story about prices. It arguably became part of a much larger question markets were asking about the U.S. itself — namely, whether American assets still deserve the premium they’ve commanded for more than a decade across everything from stocks to bonds to dollars themselves. And on this front, the details of the CPI report offer little comfort. Prices for furniture and “household operations” — a broad category that includes everything from mugs and forks to trowels and weedwhackers — continued to rise as companies began passing through higher import costs tied to tariffs. Food inflation remained stubborn, with meat, poultry, and eggs up almost 5% over the past year. Shelter costs were still climbing, too, with housing up roughly 3% year over year.By now, the mix is familiar — uneven goods inflation, tariffs doing their work in the background, stubbornly high rents and housing costs. Fed Chair Jerome Powell has repeatedly pointed to trade policy as a contributor to inflation overshoots, while emphasizing that officials need clearer evidence before concluding whether price pressures represent a one-time adjustment or something more persistent. And for currency markets, that ambiguity has real consequences.Why inflation matters for the dollar, even when it’s fallingCurrency markets are not always sensitive to inflation itself. What they care about is what inflation signals — about growth, policy, credibility, governance, and perhaps most of all, predictability. For much of the past decade, the United States could tolerate higher inflation without seeing its currency punished. During the pandemic, for instance, the dollar first surged as a safe haven, then stayed unusually strong for years as the U.S. outgrew its peers and led the global rate-hiking cycle. Stronger growth, higher interest rates, deep capital markets, and institutional stability? As long as that bundle held together, the dollar’s premium was secure.In 2025, that bundle started to fray.Even as inflation eased, it did so amid tariff-driven distortions, political pressure on the Fed, and months of missing data that made the economic picture harder to read. Investors weren’t just asking whether prices were coming down fast enough. They were asking whether the rules of the game were changing.That reassessment defined the dollar’s year.Why investors may remember 2025 as the year the world blinked — at the USDRewind back to January. The year began with the dollar near recent historic highs, still buoyed by a decade-long bull run. Then the tide went out. From January through June, the dollar fell roughly 11% against a basket of major currencies — its worst first-half performance since the early 1970s, when the collapse of Bretton-Woods and the oil crisis upended the whole global system.What changed was less about monetary policy and more about expectations. After the 2024 election, markets largely assumed another round of U.S. outperformance, supported by capital inflows, ever-spendy American consumers, and a politically independent Federal Reserve. That view cracked in the spring, when new tariff announcements and broader policy uncertainty forced investors to rethink the outlook for growth, inflation, and public debt all at once.Crucially, the dollar weakened even as the Fed resisted signaling imminent rate cuts. Instead, markets began pricing a different story: slower U.S. growth, shrinking governance advantages, a lack of clarity. And once investors stopped believing the U.S. was the clear powerhouse, the dollar’s yield premium stopped doing nearly as much work.Capital flows followed. Foreign investors hold more than $30 trillion in U.S. assets, much of it historically left unhedged — an implicit bet on continued strength. As the currency fell in early 2025, those same investors began adding currency hedges, effectively selling dollars into the market. Given the sheer scale of U.S. asset ownership, even modest changes in hedging behavior can cause significant pressure. A floor but no reboundBy mid-year, the dollar stopped falling. Some stronger-than-expected economic data in July and signs that tariffs had yet to dent activity as much as feared helped to stabilize sentiment. But stabilization is not the same thing as recovery.The dollar has spent much of the second half of 2025 hovering near its lows, trading sideways but not snapping back. That behavior tells its own story. The initial repricing of U.S. dominance may have run its course, but the old premium hasn’t been restored (AI stocks notwithstanding!). This is where Thursday’s inflation read came in.A CPI report with a clean downward trend might have offered a catalyst — reinforcing the idea that inflation risks are fading, the Fed can go on easing with confidence, and the U.S. is reclaiming its edge. Instead, markets got a partial signal. Inflation is easing, but unevenly; tariffs are still pushing prices higher; and uncertainty remains elevated. Because currency markets prize clarity, that’s not enough to shift the reigning dynamic. So is the dollar ‘screwed’ in 2026?That’s the wrong question. The better one is whether markets finish the recalibration they began in 2025 — or decide the United States remains, for better or worse, the world’s least risky place to be.Some strategists, including at Morgan Stanley, expect further dollar weakness as U.S. growth slows, interest-rate differentials narrow, and foreign investors continue hedging exposure. Others argue that the recession which recent consumer-confidence polls point to could, paradoxically, create a “flight to safety” that favors the USD. Both outcomes are plausible. What seems unlikely is a quick return to the effortless dollar dominance of the 2010s.What this means for you and meCurrency movements may be about as abstract as markets get — just an absolute blur of decimal points and price charts. Until, that is, they show up in “real” life. A weaker dollar means pricier trips abroad, more expensive imported goods (champagne; handbags; cute French sneakers I have coveted online), and fewer bargains anywhere. For most households, it’s a slow accumulation of costs that make life feel a little more expensive. The real story isn't the USD’s 11% decline. It's what caused it. For the first time in a long time, investors across the globe are pricing in the possibility that American exceptionalism might have an expiration date. Whether they're right or wrong, that shift in expectations strikes me as the most consequential repricing of 2025. 📬 Sign up for the Daily Brief
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